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Late last week, a research report by the Susquehanna Financial Group got the market buzzing about the possibility of Wells Fargo acquiring Discover Financial Services. Such an acquisition would no doubt be in line with Wells Fargo’s strategy of focusing on traditional banking services for growth. And the bank has made it clear in the recent past that it will not shy away from opportunities to grow inorganically. So, is there really value to be gained from such a merger between the fourth largest U.S. bank in terms of assets and the fourth largest payments firm?

Discover operates the fourth largest payments processing network after Visa, MasterCard and American Express. And the company also has a decent share of the number of credit cards in circulation. Discover is also eying various international markets with recent tie-ups to issue credit cards in foreign countries (see Discover Enters Russia En Route To $39), and has also looked to diversify beyond credit cards and payment offerings as is evident from the acquisition of a student loan portfolio and platform from Citigroup.

Sources suggest that the company is ready to negotiate with potential acquirers approaching them with “the right price and cultural fit.”

Certainly Looks Like A Win-Win Deal

Credit Cards constitute a small portion of Wells Fargo’s enormous business model, with the cards business contributing to less than 7% of its total value, according to our analysis. In comparison, credit cards contribute to more than a quarter of JPMorgan Chase’s value. The business cannot be easily ignored owing to the huge yield margins in credit card loans with respect to other consumer loans.

Wells Fargo had about $21.5 billion in outstanding card loans at the end of 2011. This is but a fraction of the $189 billion card loan portfolio its biggest rival JPMorgan boasts of. A Wells Fargo-Discover deal would boost the bank’s card portfolio by more than $45 billion – making the combined entity the fifth-largest card issuer in terms of card loans outstanding. In fact, in terms of the number of cards in circulation, the combined entity would be second only to JPMorgan.

As for Discover, the deal would mean an almost complete hold on the credit cards issued by one of the largest, and arguably the most profitable, of the U.S. financial giants. Not to mention the nearly limitless low-cost funding that would be made available to the card business from the bank’s huge deposits business.